Teva: 'Solid results, new CEO, cheap stock'

With 30 drugs in late-stage trials, investors are undervaluing this drug firm's long-term potential.

By TheStockAdvisors Feb 21, 2012 1:18PM
By Geoffrey Seiler, editor

Teva Pharmaceutical (TEVA) reported its fourth-quarter results; its adjusted net income topped Wall Street's expectations by a penny a share on revenue that matched estimates.

On an as-reported basis, net income for maker of generic and branded drug dropped by 34% to $506 million, or 57 cents per share, from $771 million, or 85 cents per share, in Q4 2010. The company also boosted its dividend by 25% and expressed optimism about the global strength of its OTC partnership with Procter & Gamble.

Excluding charges associated with its acquisition of Cephalon and other businesses, as well as other one-time items, the company earned $1.59 per share from its operations, one cent better than the analyst consensus and 27% better than the $1.25 in adjusted net it reported a year ago. Revenue grew by 28% to $5.68 billion.

Revenues were strong across Teva's entire stable of branded products, including respiratory product revenues of $275 million, up 27% compared to the fourth quarter of 2010. Copaxone revenues recorded by Teva increased 11% to $927 million.

Teva reaffirmed its 2012 sales forecast of $22 billion, up from $18.3 billion in 2011. Sales of its branded drugs are expected to reach $8.2 billion compared with $6.5 billion in 2011.

Management also said it was in advanced talks with the Food and Drug Administration to conduct a new trial on its own MS pill laquinimod, which missed its main goal in a late-stage trial.

The company's board voted in December to authorize $3 billion for share repurchases. Teva had $1.7 billion in cash and marketable securities on hand at the end of the year but its debt increased by $7 billion to $13.95 billion as a result of its acquisitions.

Based on rate of exchange on February 14, 2012, the company's 25% hike in the dividend translates into a quarterly payout of approximately 26.8 cents per share.

Shlomo Yanai is stepping down as CEO in May, to be replace by Jeremy Levin, a former Bristol-Myers Squibb  executive.

Teva recognizes the need to broaden its scope and the appointment of Levin, a branded pharmaceutical exec who has a history of pursuing acquisitions and licensing deals, looks like right move at this time

Overall, Teva turned in a solid quarter with no real surprises. There were a lot of moving parts due to the Cephalon acquisition but that was expected.

It capped what was a transitional year for the company as it tried to broaden its business with the Cephalon acquisition and other deals. We're looking for 2012 to be a solid year for Teva as it benefits from a new round of generics and the take-back of its rights to Copaxone in Europe.

The stock remains cheap at just 8x the current year EPS estimate, and we think most of the risks related to Copaxone are reflected in the stock price while none of the potential positives are.

With 30 drugs in late-stage clinical programs, including 15 in Phase 3 trials, we think Teva's branded pipeline looks strong and we think that it should start to gain more investor attention as the year wears on and the new CEO highlights the pipeline to the investment community.

As an Israel-based company it carries some geopolitical risk if tensions between Israel and Iran escalate, but from a purely business position, we think the stock is a "Buy." Our target is $60.

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